After early road diversion and the impact of the epidemic, etc., the company's profitability has gradually recovered, benefiting from the recovery of passenger traffic in Hong Kong in the short term. In the long term, following the renovation and expansion of its own high-speed rail station, it is expected that it will be fully integrated into high-speed rail operations. There is room for growth. For the first time, coverage gave the company an “increase in holdings” rating.
The profitability of core road production in Guangdong, Hong Kong and Macao increased significantly in the first quarter. After listing, the company acquired the operating assets and business of the Guangzhou-Pingshi section of the Guangzhou Railway Group. The scope of operation gradually moved from regional railways to the national railway backbone network. The performance performance fell short of expectations due to the diversion of Guangzhou-Shenzhen-Hong Kong and the epidemic in the early stages. Since 2023, with the continuous resumption of passenger customs clearance services across the port, the company's direct bus business has restarted after two years of stagnation. At the same time, the company continued to increase long-distance EMU trains. The long-distance bus business remained resilient during the pandemic. The total passenger traffic in January-April 2023 reached 172.26 million passengers, an increase of 92.5% over the previous year, and recovered to 57.9% in 2019. It is expected that passenger transportation revenue will continue to grow as travel demand continues to increase.
Passenger traffic across the port has recovered rapidly, and it is expected that the railway hub will be upgraded to be connected to high-speed rail operations. Passenger traffic arriving in Hong Kong increased rapidly in the short term. The number of inbound trains to Hong Kong was fully upgraded from direct intercity trains to high-speed rail. As of May 2023, the number of passengers arriving at the West Kowloon High Speed Rail Station reached 861 million, recovering to 95.3% in the same period in 2019. As Hung Hom Station continues to be suspended, all direct buses to Hong Kong currently operate through the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong High Speed Rail, and intercity direct buses have been fully upgraded to high-speed rail. Baiyun Station is expected to be completed by the end of the year. The upgrading of Guangzhou Railway Station and East Railway Station is becoming increasingly urgent. The renovated Guangzhou East Railway Station will link the Guangzhou-Shanwei High Speed Rail, the Guangzhou-Shenzhen Intercity Railway, the Guanghua Intercity Railway, etc. to form a transportation hub integrating high-speed rail, intercity, and subway. It is expected that in the future, the two stations will contribute to the company's potential business growth.
The operating mileage of high-speed rail in Guangdong Province continues to grow, and the long-term networking effect is prominent. In December 2021, the Ganshen High Speed Rail officially opened and operated, marking the achievement of high-speed rail city to city connectivity in Guangdong Province. A number of high-speed railways will soon be put into operation in Guangdong Province. Among them, the Guangzhou-Shantang Railway is expected to officially open and operate in September 2023. In the future, it will be connected to the Pearl River Delta and western Guangdong through the Guangzhan High Speed Rail, and the company line will be connected to Xintang Station. Furthermore, it is expected that the Guangzhan High Speed Rail will be completed and opened to traffic in 2024, mainly to bear inter-provincial passenger flow, taking into account passenger flow within the province. As high-speed rail lines planned and built in Guangdong Province are opened to traffic one after another, the effects of railway networking will continue to be highlighted, which is expected to lead to an increase in the number of trains operated by the company in the long term.
Investment advice. We believe that the company: 1) will benefit from the restoration of domestic railway passenger transport demand and passenger flow across the port in the short term; 2) In the medium to long term, the company is rooted in the core regions of Guangdong, Hong Kong and Macao, fully benefiting from the economic development of the Greater Bay Area. At the same time, with the continuous improvement of high-speed rail network planning in the province, it is expected that it will be fully connected to high-speed rail operations in the future, and there is plenty of room for long-term passenger flow and train traffic to grow. Based on the above judgment, it is estimated that the company's net profit from 23 to 25 was 15.2/17.0/1.82 billion yuan respectively, corresponding to 19x PE in '23. For the first time, the company was given an “increase in holdings” investment rating.
Risk warning: Macroeconomic changes have led to insufficient demand for railway passenger transportation, changes in railway fare policies, the impact of parallel line diversion, road network planning and core hub station renovation and expansion falling short of expectations.